UBS warns on investment property boom

This is an edited selection of today’s best postings on Street Talk, which is updated throughout the day on AFR.com.

A housing boom is well under way as cheap borrowing rates, increasing investor confidence and limited supply fuels demand for buy-to-let real estate, UBS analyst Jonathon Mott has warned.

In a note titled Investment Property – Speculators, spivs and tax dodgers?, Mott warns the current market ebullience could unravel if interest rates “eventually normalise" and if unemployment numbers were to further rise.

The UBS banking expert points out that Australian banks are far more exposed to the buy-to-let or investment housing sector than their UK or New Zealand counterparts – two economies that share similar cultures, demographics and home ownership levels.

According to Mott this discrepancy stems from landlords’ desire to speculate and minimise their tax outlay.

He cites bank data that implies close to 57 per cent of buy-to-let purchases are leverage, although data from the Australian Tax Office indicates the figure could be as high as 81 per cent, compared to 28 per cent in New Zealand and just 13 per cent in the UK.

Mott argues the vast majority of landlords are low-to-middle income earners and says ATO statistics show Australia has a “much higher proportion of investment properties purchased for expected capital gains (speculation) and tax minimisation (tax dodgers), rather than for rental income as seen in other countries."

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He concludes these factors are unlikely to resonate in the short term but pose a greater risk to the economic cycle and home owners if interest rates reverse upwards and unemployment levels spike.

The market could then be awash with investment property. “Negative gearing means negative cash flow and with unemployment this begins to bite. Further, there is no emotional desire to ‘save the house’, implying large amounts of investment property could flood the market."

Mott maintains there is no other Western democracy “in which the landlord population is as highly leveraged or in the middle income bracket as Australia".

He warns current stress tests do not properly reflect the impact to the wider economy from an implosion in this sector and urges banks, regulators and market participants to consider the implications of a fallout.